Thank You

Error.

Investors got to face some of their biggest fears last week, and for the first time in more than a month, they flinched.

We learned last week that the Federal Reserve is considering ways to reduce the stimulus program, and that China's manufacturing sector appears to be contracting. The cumulative stress of that news sent stocks around the world lower. U.S. equities performed better than some overseas markets, but they weren't immune.

The Dow fell 51.3 points on the week, or 0.33%, to 15,303.1. The S&P 500 dropped 17.87 points, or 1.07%, to end at 1,649.60. The technology-heavy Nasdaq Composite index lost 38.92 points, or 1.14%, to 3,459.14. All three indexes snapped four-week winning streaks.

It was the week that the Fed tested the brakes on the easy-money machine currently driving the market forward. Multiple members of the Fed Open Market Committee were open to slowing down the stimulus program as soon as June if the economy improves, minutes released Wednesday from the group's meeting a month ago showed. In testimony before Congress the same day, Fed Chairman Ben Bernanke reassured the markets that he doesn't want to stop the asset-buying program too abruptly. But investors balked nonetheless.

Aside from Wednesday, though, U.S. equity trading didn't have a strong bearish tilt, and few expect the six-month bull run to suddenly reverse. After a late rally on Friday, the Dow made it past 100 days without a single three-day losing streak, the longest such streak ever.

But investors are still a little giddy, like the high school seniors coasting through second semester who haven't yet realized they should be looking for a summer job. Investor surveys and put-call ratios are remarkably bullish, says Christian Andreach, the co-head of global equities at Manning & Napier. "We are a little bit concerned by some of the complacency out there," he says.

Some fear that investors now entering the market are simply playing catch-up.

"When people are being forced to buy for no other reason than they feel they have to for fear of missing the rally, that's not a healthy market," said Garth Friesen, co-chief investment officer at hedge fund III Associates, and a member of the New York Fed's Investor Advisory Committee. "We've been advocating a little more caution. The whole move we've had in the S&P this year has been due to multiple expansion."

Some stocks saw particularly large swings on the week.
Procter & GamblePG -0.29270577215782695%Procter & Gamble Co.U.S.: NYSEUSD85.16
-0.25-0.29270577215782695%
/Date(1425420179190-0600)/
Volume (Delayed 15m)
:
6029502AFTER HOURSUSD85.1685
0.008499999999997950.009981211836542978%
Volume (Delayed 15m)
:
65789
P/E Ratio
24.92828288741877Market Cap
230650569823.645
Dividend Yield
3.023015500234852% Rev. per Employee
692110More quote details and news »PGinYour ValueYour ChangeShort position
(ticker: PG) rose 4% on Friday after the company announced late on Thursday that CEO Robert McDonald had suddenly retired and former CEO A.G. Lafley was taking his place. McDonald had been under fire from investors after the company posted weak third quarter results last month, and activist investor Bill Ackman had been agitating for change.

Saks
(SKS) jumped 31% on the week on news speculating the retailer might merge with privately held rival Neiman Marcus.

Touch-screen company
Uni-PixelUNXL 1.361573373676248%Uni-Pixel Inc.U.S.: NasdaqUSD6.7
0.091.361573373676248%
/Date(1425420000137-0600)/
Volume (Delayed 15m)
:
117111
P/E Ratio
N/AMarket Cap
81640110.5395698
Dividend Yield
N/ARev. per Employee
N/AMore quote details and news »UNXLinYour ValueYour ChangeShort position
(UNXL) fell 12% on the week, after a 22% drop the previous week. Uni-Pixel said it now expects products with its UniBoss films to hit shelves in the fourth quarter instead of the third quarter because of delays at a partner; management said its own manufacturing schedule was still on track. The company was featured in a skeptical Barron's story two weeks ago ("Out of Touch?," May 13).

TWO LARGELY UNRELATED themes have developed in the equity market in the past few months. Investors have plowed money into defensive stocks as they seek higher dividend yields and steady growth outside of the bond markets. As a result, health care and consumer stocks have soared this year.

Investors willing to bet on stocks with high short interest, such as
NetflixNFLX -1.1535658511192088%Netflix Inc.U.S.: NasdaqUSD474.71
-5.54-1.1535658511192088%
/Date(1425420000007-0600)/
Volume (Delayed 15m)
:
1053829AFTER HOURSUSD474.11
-0.599999999999966-0.12639295569926903%
Volume (Delayed 15m)
:
P/E Ratio
106.91666666666667Market Cap
29054165027.6184
Dividend Yield
N/ARev. per Employee
2246800More quote details and news »NFLXinYour ValueYour ChangeShort position
(NFLX) and
First SolarFSLR -0.6872852233676976%First Solar Inc.U.S.: NasdaqUSD60.69
-0.42-0.6872852233676976%
/Date(1425420000215-0600)/
Volume (Delayed 15m)
:
3122482AFTER HOURSUSD60.68
-0.00999999999999801-0.01647717910693689%
Volume (Delayed 15m)
:
P/E Ratio
15.325757575757576Market Cap
6128844170.0238
Dividend Yield
N/ARev. per Employee
699343More quote details and news »FSLRinYour ValueYour ChangeShort position
(FSLR), have been richly rewarded. Those stocks are among the top performers in the S&P 500 in the second quarter, so far. In fact, the 50 stocks in the S&P 500 with the highest short interest have far outperformed the 50 stocks with the lowest short interest in the current quarter. As of early last week, the short-sellers' favorites were up 12%, while the stocks they've ignored were down 5%, according to Bespoke Investment Group. Bespoke calls it "the dash for trash."

"People are either reaching for yield or groping for growth," says Brian Jacobsen of Wells Fargo Funds Management. "You've got a lot in the middle there that just doesn't seem to move much one way or the other."

ONE SECTOR THAT has performed well this year is health care, up about 22%. But some companies have been left behind in the rally.

Express Scripts acts as a middleman between employers and pharmacies, processing about 1.5 billion prescriptions every year. The company bought rival Medco Health Solutions last year, and now manages prescriptions for roughly a third of Americans. Its sales are expected to jump to $101.1 billion in 2013 from $46.1 billion in 2011, before the Medco deal closed.

"Now they're the dominant player," says Maxim Group analyst Anthony Vendetti. "Express Scripts clearly has the No. 1 foothold in the market, in terms of revenues, in terms of customers. The stock hasn't yet reflected its bargaining power" with both drug companies and clients.

Analysts and bullish investors expect Express Scripts' results to start showing the company's increased power and greater efficiency soon. Express Scripts could benefit as major drugs continue to lose patent protection, because the company earns a better margin on generic drug prescriptions than on branded ones. The Medco acquisition has helped Express Scripts boost its specialty pharmaceutical and mail-order businesses, both of which add to profitability. And CEO George Paz says the company has gotten hip to what he calls "consumerology," a far-out way of saying that the company is mining its prescription data to find better ways of keeping patients healthy and improving its business.

The improvements are starting to show up in Express Scripts' results. After initially tamping down expectations late last year on concerns about the economy, the company is now exceeding its lowered targets.

In the first quarter, Express Scripts posted earnings of $374 million, or an adjusted 99 cents a share, on $26.06 billion in revenue. Analysts had been expecting 97 cents a share on $25.048 billion in revenue. For the full year, Express Scripts raised its guidance by three cents to between $4.23 and $4.33 a share, which amounts to growth of 13% to 16%. Analysts are projecting $4.29.

Managing prescriptions is a low-margin business—the company is paid a small fee for each prescription it processes. But the merger is helping Express Scripts cut costs, and margins are expected to swing higher.

Gross margins rose to 7.8% in the first quarter from about 7.1% a year ago.

"A 10-to-20-basis-point change in gross margin [a 0.1%-0.2% change] has a major impact on the bottom line," says Vendetti. "If the margins expand, there's a lot of opportunity for the shares to benefit."

Express Scripts has estimated that it will be able to cut $1 billion in annual costs through the merger, a small but still significant portion of the company's $90 billion in costs. Following the Medco merger, total debt spiked to nearly $16 billion at the end of 2012 from $2.5 billion in 2010. But Express Scripts has been able to boost its free cash flow considerably, allowing it to pay off its obligations more quickly than it had anticipated. The company generated $4.6 billion in free cash flow in 2012, more than double what it generated in 2011.

That allowed Express Scripts to begin buying back shares earlier than expected. After holding off on buybacks for a year to pay off debt, the company announced a new plan in March to repurchase 75 million shares, or about 9% of its total share count.

The buybacks could help the company post annual growth in earnings per share of 15%, wrote Jefferies analyst Brian Tanquilat this month in upgrading shares to Buy with a $74 price target.

Jeff Jonas, co-portfolio manager of the Gabelli Healthcare and Wellness Trust, thinks the company is slow-playing a very good hand. "Management has been overly conservative with guidance," said Jonas, whose fund holds shares in the company.

Express Scripts could struggle if health insurers decide to run their own pharmacy-benefits programs instead of outsourcing them to Express Scripts—
UnitedHealth GroupUNH -1.3461538461538463%UnitedHealth Group Inc.U.S.: NYSEUSD112.86
-1.54-1.3461538461538463%
/Date(1425420042165-0600)/
Volume (Delayed 15m)
:
3050358AFTER HOURSUSD112.86
%
Volume (Delayed 15m)
:
P/E Ratio
19.492227979274613Market Cap
109102710293.114
Dividend Yield
1.3290802764486975% Rev. per Employee
767647More quote details and news »UNHinYour ValueYour ChangeShort position
(UNH) is beginning to handle many of its own services this year, for instance. But health-care trends are working in Express Scripts' favor. Companies rushing to comply with Obamacare are unlikely to switch providers, experts predict, and CEO Paz said the company is "enjoying one of our highest client-retention years ever." As Express Scripts attracts clients, it should also attract investors looking for an inexpensive stock.

IN AN ITEM on
OrbitzOWW 0.25951557093425603%Orbitz Worldwide Inc.U.S.: NYSEUSD11.59
0.030.25951557093425603%
/Date(1425420323288-0600)/
Volume (Delayed 15m)
:
7265397AFTER HOURSUSD11.59
%
Volume (Delayed 15m)
:
P/E Ratio
72.4375Market Cap
1280824886.2754
Dividend Yield
N/ARev. per Employee
716928More quote details and news »OWWinYour ValueYour ChangeShort position
(OWW) last week, we incorrectly said that 70% of its revenue comes from air travel, which has low profit margins. Air travel is 70% of gross bookings, or the total amount that customers pay in transactions; much of that goes directly to the airline, hotel, or car-rental company. Air travel is 33% of Orbitz's revenue, which is the cut the company takes of gross bookings.

It was a serious goof, but it doesn't affect our view that Orbitz's 250% jump in share price over the past six months—mainly in reaction to increases in hotel revenue—isn't justified by the long-term prospects. Though the hotel business has markedly higher margins than those of air travel, it accounts for just 31% of revenue, too small to justify such an enormous stock rise.

We asked Orbitz for a hotel outlook for 2013, but the company declined to comment. Marketing costs and other expenses are increasing faster than the first quarter's 7% rise in total revenue, and will probably continue to do so. Despite the first-quarter hotel improvement, Orbitz reported a $12 million loss before taxes, double the level of a year earlier. Still doesn't sound like a stock that should be trading at 22 times next year's estimated earnings. -- Vito J. Racanelli